The Next M&A Deal: How Ready is Your HR?
‘All things are ready, if our mind be so’.
- William Shakespeare, Henry the Vth
I must confess I was a tad confused when I began writing this article; should the title be ‘How prepared is your HR’ or should it be ‘How ready is your HR’? A quick check in the Merriam-Webster told me that while ‘preparedness’ is geared more towards future action, ‘readiness’ pertains to the here and now. Given how active the deal environment is, in our globally linked world, it is only apt that we be fully ready for the next M&A deal. So, while being ‘ready’ for the upcoming M&A deal is clearly a key performance indicator for HR functions, a state of ‘preparedness’ is clearly warranted as well. I am of the fi rm view that while ‘M&A readiness’ will help ensure business continuity and seamless transition (with little or no dip in employee engagement figures), it is M&A preparedness that will help realize deal goals.
Remember the analogy – We must be ready for the battle, but we must prepare for the war.
Through this article, not only do we define M&A readiness and its various facets, but we also focus on M&A preparedness and how it is differentiated from its short-term counterpart. However, given the pressure that organizations and HR leaders face to deliver on short-term (the next M&A deal), expectations from their business colleagues, readiness seemed more apt as a focus area for this article.
Any M&A deal cycle has various stages:
- Target identification
- Due diligence
- Deal go/no-go decision
- Integration planning
- Integration & change management
Some research conducted recently by Aon in India with the top 40 most acquisitive organizations suggests that HR’s contribution is the heaviest during due diligence and integration stages and that it plays little or no role in the other stages.
What this means is that people issues, aspects of culture, employee attrition and engagement levels often get overlooked when a decision regarding ‘deal go/no-go’ is being taken. We have seen only a handful of clients that will decide not to go ahead with a deal if significant people issues are witnessed during the due diligence stage.
Aon’s research findings also indicate that overachievers, i.e. organizations that achieve their defined business goals that they set at the start of a deal, leverage the HR team during other critical stages of a transaction – deal go/no-go stage and integration planning – far more than underachievers, i.e. organizations that do not meet their goals.
Let’s dissect HR’s involvement and readiness at various stages of the M&A deal cycle:
While an HR due diligence is very often conducted in Asia, it tends to limit itself to actuarial valuation of unfunded liabilities, a summary of compensation and benefits programs, and a cost-impact assessment from a compensation and benefits standpoint, so that these elements can form inputs to the financial model. A due diligence never really focuses on the soft aspects that matter, such as culture, climate and engagement.
Any research that you come across on M&A will mention that culture is the most important aspect for achieving deal success. So, then we need to ask ourselves – why do we not assess it during the due diligence phase? Why do we choose to live with this contraction?
This is not going to happen until HR manages to push its agenda through in board meetings and management committees. The HR function needs to be proactive, capable and have a presence to ensure that it is heard in these forums.
The next step is the deal go/no-go decision. As already mentioned, HR has little or no involvement at all. People issues may be overlooked in the hope that we will manage them later.
When it comes to closure, ensuring replication of compensation and benefits programs for transferring employees is a key priority, and that is a clear to-do for HR, which gets done by Day 1.
In the integration planning stage, while the Integration Management Office (IMO) draws up major plans for integration across functions, we have seen that HR integration is focused on the key aspects of compensation and benefits. If I were to choose between the two, I would say benefits integration is a greater focus. The larger HR integration never really focuses on cultural integration of the two organizations, which continue to operate as standalone entities.
A question for all of us today is this – when there has been so much talk about ‘culture’, not just now but also 20-30 years ago, why do we actually do so little? Does it have anything to do with HR readiness and sponsorship? Or is it business leadership that wants to focus on the hard aspects of compensation, benefits, productivity and ultimately, achieving results?
It is amply clear again that HR needs to push the leadership team to delve into the softer aspects that matter and show the impact it can create.
So, while one aspect of readiness is that HR should be at ‘the table’, the other is that of the HR skill set and actual capability to deliver upon M&A deal goals.
What skills would make HR ready to deliver successfully on an M&A transaction? I believe one should focus on three aspects:
- Developing HR’s planning, leadership and technical capabilities
- Elevating HR’s ability to collaborate with business leadership on organizational design, business/deal acumen, and its knowledge of day-to-day operations
- Developing general business skills that would improve HR’s contribution to M&A
It is very important for HR to be held accountable for its M&A-specific contributions. Hence, deal KPIs should be part of HR scorecards. Identifying and retaining key talent, factoring human capital integration costs into the deal model, and successful delivery of integration and change management plans are some illustrations.
I believe this is HR’s time to shine, through value creation and financial results in a long-anticipated, fast-paced deal environment.
Associate Partner & VP, South East Asia Head
Aon Strategic Advisory